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Topical observations from the Qi macro lens. Build your investment roadmap with the best-in-class quantitative analysis and global data.

18.04.2023

Complacency?

VIX is below 17. The chart below shows the equity market's "fear gauge" in z-score terms which is how Qi models all its macro variables. It is now 1.6 standard deviations below trend.

Eyeballing the chart you can see it is possible for VIX to spend a protracted period at these lower levels. However, it is also fair to point out that we are close to extremes of the range. These are levels that suggest equity markets are skewed to complacency.

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12.04.2023

HUF - the road to hell
is paved with positive carry

The Hungarian Forint has been one of 2023's best performing currencies. Geopolitical risks and weak economic data have seemingly been offset by carry dynamics with the Hungarian National Bank remaining resolutely focused on keeping rates high to fight inflation.

Qi largely agrees but with some early notes of caution.

Macro-warranted fair value is still trending lower for USDHUF.

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11.04.2023

Hawkish RBNZ, dovish RBA
= AUDNZD downside?

Last week both the RBNZ and RBA met. The former surprised with a more hawkish 50bp rate hike; the latter left rates unchanged and seemed to emphasize growth vulnerabilities rather than inflation threats.

Such a contrast in respective policy stances would appear to clearly point to downside pressure for AUDNZD fx.

But a key part of investing is measuring the degree to which existing news is already priced in. This short video shows how Qi can be used to:

03.04.2023

The Aussie battler

After the initial excitement, the China re-opening trade has generally underwhelmed. Last week's news about Alibaba splitting up into six "baby Babas" has rekindled hopes that the tech sector at least could kick back into life.

What about other China trades? The Aussie Dollar appears to have lagged the most recent bounce in risk appetite. What's the quant macro perspective on the Aussie?

This is our Watchlist of various Aussie fx crosses:

29.03.2023

Where AI and safe haven tech meet

Two of 2023's big investment themes - next generation AI, and the flight into big tech stocks as safe haven plays - both coincide with NVIDIA.

This 2 minute video looks at these dynamics and then adds a macro overlay. In short, while model value has risen some 14% year-to-date, the stock has run ahead of macro fundamentals.

This isn't a bearish recommendation per se. It remains a great stock with a strong story.

It is, however, a reminder that with quarter end looming (and potential rebalancing flows maybe looking to trim some winners) it has discounted a fair amount of good news already.

22.03.2023

Stalling speed?

While we await tonight's momentous Fed decision, a quick re-cap on one of 2023's other big macro topics: China's re-opening.

Qi has a number of factors we use in our models that speak to the health of the Chinese economy and financial system.

Each time the factors are shown in z-score terms. Essentially when a factor is above (below) the zero bound, it is running above (below) trend. We update them below:

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14.03.2023

Defensive equity plays

Thus far, equity markets have taken the massive re-pricing of the bond market in its stride.

For some investors, Silvergate / Silicon Valley / Signature are idiosyncratic stories. Or, even if there are systemic risks, they believe the Fed will ride to the rescue.

But for others a recession has just become significantly more likely given the new banking landscape and the implications for the real economy.

Increased insurance contributions, competition for deposits, stricter lending standards all point to a material tightening in credit conditions.

For those investors, the critical question now is what are the best defensive bets?

A quick video.

08.03.2023

Decoupling

In 2022, global central banks had a common enemy. Everyone was unified in raising interest rates to fight inflation.

But, in 2023, there are early signs there could be sharp divergences between central banks and their priorities.

This week, the Fed seemingly doubled down on its hawkish message. Down in Australia while the RBA hiked rates, their forward guidance was more dovish.

Shifts in different country's relative policy stance will have huge ramifications for investors. That's true across asset classes but arguably currencies are at the sharp end of this. Even if you don't trade FX, this is an important market to watch.

In FX, interest rate differentials are often decisive. But not always. In 2023, knowing which currency pairs are being driven by rate differentials is going to be critical.

01.03.2023

Amber flag for risk appetite

The Qi Vol Indicator has risen to 15.3. Historically, a one month rise of 20 points plus has provided investors with an early warning that some kind of volatility shock may be imminent.

Increases in the mid teens are not enough for a signal. But they do put us on alert.

It has had some false dawns, but eye-balling the chart below you can see there have been several occasions when the blue line spiked in advance of VIX itself.

28.02.2023

What next for the China re-opening trade?

February was the month where, from a Western perspective, strong economic data and sticky inflation prompted markets to re-price towards the Fed's higher-for-longer view of the world.

But it was also the month when the China re-opening story stalled. After a strong start to 2023, the idea of a strong bounce in Chinese economic activity lost momentum. Will March re-boot that narrative?

Tomorrow we get China's PMI data for manufacturing and services. On Friday the unofficial Caixin series give their own PMI update. The consensus looks for a bounce and, if that acts as a catalyst for renewed optimism, what is the most efficient China re-opening trade currently?

The Watchlist below is not exhaustive but shows a couple of potential trade expressions.

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11.04.2023

Hawkish RBNZ, dovish RBA
= AUDNZD downside?

ascertain whether interest rate differentials are indeed the critical driver of any currency cross
measure the degree to which yield spreads are already reflected in the price
use Qi's macro valuations to provide a roadmap for potential trading opportunities

03.04.2023

The Aussie battler

What stands out?

Amongst the majors that are in macro regimes, Aussie screens as modestly cheap versus the Euro, Yen and both Kiwi and Canadian Dollar.
The issue is macro momentum points to further Aussie depreciation.
For example, since mid-March, Qi macro model value has fallen 1.25% for AUDNZD and 2.3% for AUDJPY; over the same period, macro-warranted model value for EURAUD has risen 1.8%.
It's the same basic dynamic each time - interest rate differentials and risk appetite (VIX + corporate spreads) have driven the model moves.
Tomorrow's RBA announcement will be important. But it is important to note the current pattern shows that, for these FX pairs, Aussie is not the chief beneficiary during periods of "risk on".

The exception is AUDUSD

Macro fair value has bounced 2.9% since mid-month.

Why? The chart below breaks down the attribution of the recent move. Every factor moved in its favour but the key drivers were metal prices, interest rate differentials and "risk on" (tighter credit spreads, lower VIX).

There's a modest valuation edge. Qi has AUDUSD as 1.0% cheap as spot has slightly lagged the improvement in macro conditions.

When the valuation gap is modest, the investment conclusion is what model value does next is critical.

If you believe April can maintain a strong risk appetite vibe... if you believe tomorrow's RBA keeps future rate hike options open... then ignore the cheaper valuations on other Aussie crosses, AUDUSD upside is the the most efficient play.

29.03.2023

Where AI and safe haven tech meet

14.03.2023

Defensive equity plays

08.03.2023

Decoupling

The chart above looks across G10 fx pairs and ranks where rate differentials feature as a driver. The y-axis simply shows whether interest rate spreads screens as the top driver, or holds less sway within Qi's models.

This is the first step in the pre-trade process.

step one - know which fx crosses will react most as interest rate markets move to reflect shifts in different central banks' policy stance.
in this instance, Aussie and Canadian crosses stand out as ones where cross-market rate spreads really matter. Yes both are resource-rich countries and that may lead some to use them as China proxies. But right-here-right-now, it is the RBA's and BoC's policy stance that matters more.
for the US Dollar, if you have a strong view on the Fed (whether hawkish or dovish pivot), don't trade USDCHF. USDJPY and USDNOK will be more efficient.
for the Euro, EURNOK reflects the ECB / Norges Bank reaction function. EURUSD is not currently a nominal rate differential play. Real yields matter more; and global growth considerations and credit markets matter even more still.
step two - screen out the models that are not in regime (greyed out dots in the chart above) and focus on those where macro is the dominant narrative (red dots rather than grey).
step three - add in the Qi valuation overlay. For example, USDNOK and AUDUSD have the biggest Fair Value Gaps. Both show the USD as having done a fair amount of work discounting the idea of a more hawkish Fed. And, in the case of the Aussie, now a more dovish RBA.

Divergence is going to be a big theme in 2023. Think China versus the US. Not just the politics but the contrast between Fed tightening and potential PBoC easing over this year.

Understanding what is driving asset prices is a critical first step in any investment process. #measuringmacro

01.03.2023

Amber flag for risk appetite

They include:

“Volmageddon” in early 2018 was pre-empted by several weeks.
The Powell policy error in late 2018 / early 2019 was again anticipated.
Covid & lockdowns. US equities were making new highs in Jan/Feb 2020 when Covid was perceived to be another Asian epidemic rather than a global pandemic. Qi was warning that macro fundamentals were not driving the rally & that risk levels should be adjusted.
2022 bear market. Once again, the sharp loss of macro’s ability to explain price action pre-empted the move in equity markets.

This time is different. The four most dangerous words in investing.

However, it is worth noting that this time around the move in model confidence comes from a higher starting point. Most of the Short Term models that constitute the Vol Indicator were tracking at 90% plus over January and February.

That's why the blue line is so low in the most recent part of the chart above.

To that extent, it may suggest we need to see a more sustained move higher, i.e. the Vol Indicator needs to increase by 30 or 40 points over the month rather than the usual 20.

Remember the core hypothesis* underpinning the Vol Indicator is that macro is inherently a more stable regime for markets than periods when positioning, deleveraging, sentiment shifts or geopolitics are driving price action. While model confidence is over 65%, macro is still the prevailing regime.

Finally, it is worth noting which components are responsible for the latest increase in the Indicator. The two biggest moves come from:

ST Euro Stoxx 600 model confidence has fallen from 95% on Feb 1st to 66% today.
ST EURUSD model confidence has fallen from 95% to 73% over the same period.

The point being it looks like Europe is at the epicentre of this move. The European single currency and equity market is predominantly where the regime shift is taking place.

Given our observation that European equities and European High Yield credit (iTRAXX XOver) rank amongst the most vulnerable risky assets, this Vol Indicator is worth watching and would appear to have a strong EU flavour.

* the PDF download below has the White Paper which provides an initial introduction to our Vol Indicator.

PDF download

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